Indonesia is on the threshold of becoming one of the world’s leading emerging market economies, driving growth in Asean over coming decades

Indonesia: Asia’s Next BRIC
Economy

When President Susilo Bambang
Yudhoyono (SBY) was elected to lead
the Indonesian government in 2004, Indonesian
gross domestic product (GDP)
per person was just US$1,200, which
was virtually unchanged since 1995. For
the previous decade from 1995-2004,
Indonesia had become mired in a period
of economic stagnation. Indeed, GDP
per person had fallen sharply during the
East Asian Crisis in 1997-98, with Indonesia
in political and economic turmoil.

However, within the seven-year
period since President SBY took office
in 2004, GDP per head in Indonesia has
more than doubled, to around $3,000,
reflecting the remarkable economic
transformation that has taken place in
Indonesia under his leadership. The
medium-term outlook is for further
progress in boosting per capita incomes,
with GDP per person projected
to exceed $5,000 by the end of 2015.

Source: IHS Global Insight

Today, global financial investors are
increasingly discussing the possibility
that Indonesia should be included
among the BRIC (Brazil, Russia, India,
China) economies, the largest fastgrowing
emerging economies in the
world. This has also been reflected in
capital flows, with both foreign direct
investment and portfolio capital flows
strengthening significantly in 2010
due to growing international investor
confidence in the Indonesian economic
outlook.

Nevertheless, Indonesia remains a
country facing tremendous further challenges
in achieving fundamental human
development goals. Despite progress
in poverty reduction since 2004, the
World Bank estimates that 32 million
Indonesians live in poverty, with half
of all households close to the national
poverty line. Rural poverty remains a
burgeoning problem, with the rural poor
accounting for around 70 percent of
the total numbers in poverty. Similarly,
despite large improvements in the access
to basic health care since 2004, with
health insurance coverage for the poor
having roughly tripled to cover around 43
percent of the population, this still leaves
half of the poorest segments of society
without access to basic health care cover.

However, President SBY’s government
made important economic progress
during his first term of office, setting the
foundation for sustainable development
and poverty reduction. The macroeconomic
achievements of his economic
frontbench during his first term of office
have included substantial achievements
in reducing the twin burdens of high
government debt and external debt over
the last seven years. Government debt as
a share of GDP has been reduced from 56
percent of GDP in 2004 to an estimated
26 percent of GDP by 2010, putting Indonesia’s
government debt burden in a very
favourable light compared with the fiscal
plight of most Organization for Economic
Cooperation and Development countries
today.

Indonesia’s external account position
has also improved substantially, with
external debt as a share of GDP having
been reduced from 54 percent of GDP
in 2004 to around 23 percent of GDP in
2010, another very significant achievement
in reducing Indonesia’s vulnerability
to external financing. This improved
external account position has also been
strengthened by a significant rise in
foreign exchange reserves since 2004.

In 2004, Indonesia’s FX reserves were
around $35 billion, and since then have
tripled, breaking through the $100 billion
mark in early 2011 and hitting $106 billion
by the end of March 2011, equivalent
to around six months import cover.

A Trillion Dollar Consumer
Market

Source: Bank Indonesia

Indonesia demonstrated significant
economic resilience during the global
financial crisis in 2008-09. It weathered
the storm with positive GDP growth of
4.6 percent in 2009, followed by GDP
growth of 6.1 percent in 2010. The economic
outlook is for potential growth of
around 6 to 7 percent per year over the
medium term. This is projected to drive
Indonesian GDP through the $1 trillion
mark by 2014, reinforcing Indonesia’s
position as one of the largest developing
economies in the world. Importantly, the
size of its domestic consumer market is
also expected to surpass the trillion dollar
mark within the next decade, making
it an increasingly attractive economy for
large multinationals, as sustained strong
economic growth and its youthful demographic
profile drive consumer spending.

A key driver of Indonesia’s growth
over the long term will be the strong
demand from both China and India for
both agricultural and mineral resources
from Indonesia, boosted by rapid growth
in consumer spending in both countries.

This is already attracting significant
direct investment flows into Indonesia
from Chinese and Indian resource firms
that are keen to secure supply lines for
key commodities.

The growing economic weight of the
Indonesian economy among the group of developing nations has also lifted the
geopolitical importance of Indonesia.

This is reflected in its new seat since
2009 as a member of the G-20, which
has become the main global international
forum for economic decision-making
for the world economy, as well as its
new seat on the BIS Basel Committee,
the key international standards-setting
body for the global financial services industry.

This has considerably increased
its international political weight, a trend
which is expected to continue over
coming decades.

This has most significance within the
Asean region. Indonesia’s position as
the largest economy among the Asean
countries, together with the impact of
its sustained economic expansion on
trade and investment flows with other
Asean members, has made Indonesia
an increasingly important driving force
for the future economic growth of the
Asean region. As the size of the Indonesian
domestic market continues to expand
rapidly, with total GDP projected
to exceed $2 trillion by 2022, Indonesia
is expected to propel Asean to become
one of the fastest growing regions of
the global economy over the medium to
long term..............